Chapter in book NFV about import and export of franchise formulas, written by mr. Th.R. Ludwig

mr. Th.R. Ludwig

Chapter 13

Code of Honor Implicitly Applicable to Master Franchise Agreements?

Theodore Ludwig

Introduction.

Master franchise agreements often tend to be extensive. The mostly Anglo-Saxon agreements usually contain extensive provisions with regard to intellectual property rights, interim termination options, additional best efforts obligations, et cetera. Many of these obligations directly or indirectly affect the relationship between the master franchisee and its individual franchisees. For example, if one of the many early termination options were to be effected by a master franchisor against its master franchisee, it could result in an early termination of the franchise agreements between the master franchisee and its individual franchisees. In practice, relevant obligations from the master franchise agreement are often not passed on to the franchise agreements between the master franchisee and its individual franchisees.

Relationship Code of Honor and Master Franchise Agreement.

In itself, the European Franchise Code of Honor, as applied by the various national franchise associations and endorsed by the European Franchise Federation (EFF), does not apply to the relationship between a franchisor and its master franchisee, according to Article 6 of the European Code of Honor on Franchise franchising. However, in the same paragraph, the European Code of Honor is declared applicable to the relationship between the master franchisee and its individual franchisees : “Because a master franchisee acts as a franchisor in the relationship with its individual franchisees, this Code of Honor also applies to that relationship. ”

Article 5 paragraph 3 of the Honor Code also states the following: “All agreements and contractual arrangements relating to the franchise relationship must be written, or translated by a certified translator, into the official language of the country where the individual franchisee is located. Signed agreements must be immediately handed over to the franchisee.”

Article 5 paragraph 4 also stipulates: “Clearly, unequivocally and honestly, to state the respective obligations and responsibilities of both parties, as well as all other important terms of the cooperation.”

Thus, on the basis of the Code of Ethics, it may justifiably be concluded that a master franchisee is obliged to make known to the franchisees all relevant conditions from the master franchise agreement for the benefit of its individual franchisees. Article 5 paragraph 4 further stipulates that this obligation is not only limited to the content of the master franchise agreement, but also pertains to “all other important conditions of the cooperation”. This includes business plans, further implementation agreements, handbooks, etc. In practice, the relationship between the master franchisor and the master franchisee is, of course, of paramount importance. The development, progress and evaluation of that relationship is of direct significance to the franchisees who in turn are dependent on the master franchisee. Thus, under the Code of Honor, a master franchisee is required to be franchisees “clear, unambiguous and fair” to be informed about this progress. This can, for example, relate to product innovation, training methodologies, changing marketing strategies, etc., but also long-term developments, such as a possible imminent transfer of the company from the master franchisor, must be communicated transparently and properly by the master franchisee to the franchisees in the country in question.

Field of tension master franchisor – master franchisee – franchisees.

In practice, however, the master franchise agreement usually contains very far-reaching confidentiality clauses. It can therefore be argued that absolute confidentiality clauses should at least be qualified in the sense that the master franchisee is given full opportunity to inform franchisees openly and honestly. Incidentally, even without application of the Code of Honor to the relationship between a master franchisee and its individual franchisees, the master franchisee is bound to do so. If essential developments for the franchisee’s business are concealed by the master franchisee (who also functions as a franchisor in its relationship with the franchisees in the country in question), this in itself is in principle already unlawful, unless justified circumstances be order. However, under Dutch legislation, as well as under the legislation of neighboring countries, those special circumstances are not easily addressed. The same applies to further developed standards in this context on the basis of various case law in various countries, as well as various states of the United States of America.

Influence Honor Code on Master Franchise Agreement.

Reasoning along these lines, it goes without saying that several, and indeed many, provisions of the Code of Honor indirectly and directly affect the relationship between the master franchisor and the master franchisee, since all provisions of the Code of Honor must be applied by the master franchisee in his capacity. of the franchisor should be directly and unconditionally contained in the franchise agreements between the master franchisee and its individual franchisees. An example is Article 5 paragraph 5 8^e bullet point. This provision reads as follows: “The agreement should contain at least the following essential provisions: the grounds for an extension of the agreement”. This is how the master franchisee servesnot to enter into agreements with its individual franchisees that could in any way conflict with the terms of the master franchise agreement. Please note: this does not only concern any grounds for renewal from the master franchise agreement that may be relevant to the franchise agreements between the master franchisee and the individual franchisees; this may also relate to targets that may or may not be adjusted in the interim between the master franchisor and the master franchisee, in the eyes of the master franchisor unjustified adjustments by the master franchisee of the franchise formula in the country in question etcetera. With regard to the provisions, further developments and expectations in this context, the master franchisee is obliged under the Code of Honor to inform his individual franchisees fully and unconditionally.

The same applies to the provisions also in Article 5 paragraph 5 with regard to “the duration of the agreement, which must be long enough to enable the individual franchisee to amortize his initial franchise investments” and “provisions regarding termination of the agreement”. The same reasoning applies to these provisions: the master franchisee cannot enter into a master franchise agreement with the master franchisor if this agreement contains such early termination options that it may be risky with regard to the obligation that the individual franchisee should enable to operate its franchise. return on investment. In addition, on the basis of the same Code of Honor, in combination with the standard developed in case law, the master franchisee is obliged “financial estimates or forecasts, if available” (Article 4 paragraph 3 sub 5) must be made available to the franchisees. These forecasts must then be in line with any provisions in this regard in the master franchise agreement, in the broadest sense of the word.

Conclusion and recommendation.

Indirectly, the European Code of Honor thus has a far-reaching influence on the master franchise agreement, given that the master franchisee is fully bound by the Code of Honor in its relationship with the franchisees in the broad sense, therefore not limited to the individual franchise agreements. In order to prevent a master franchisee from remaining in an unnecessary, statusless dilemma, it is therefore better to adjust the Code of Honor on this point and the last paragraph of Article 6, which now reads: “The Code of Honor shall not apply to the relationship between a franchisor and its master franchisee” to read: “the Code of Honor also applies to the relationship between a franchisor and its master franchisee in all its aspects. The Master Franchisee shall fully and openly inform the Franchisees of the contents of the Master Franchise Agreement, as relevant to the individual Franchisees, as well as fully and honestly inform the Franchisees of all relevant terms and developments in the relationship between the Master Franchisee and the Master. franchisor, as relevant to the individual franchisees”.

As an aside, it should be noted that it is sometimes argued that the Code of Honor is not legally enforceable. However, this is the case if the parties expressly declare that the status of the Code of Honor is the same as that of the franchise agreement and/or master franchise agreement, i.e. a fully binding document. Incidentally, in accordance with the articles of association of the NFV, the franchisor members of the Dutch Franchise Association (NFV) are also obliged to enter into such contracts with their franchisees. Naturally, this does not only apply to international relationships, but various countries and national franchise associations can thus provide the Code of Honor with full binding effect between the franchisor and the franchisees, respectively between the master franchisee and the franchisees and between the master franchisee and the franchisees. the master franchisor, wherever it may be located. If the master franchisee does not cooperate with this, it should be clear on the basis of the above that he is already acting in advance in violation of the Code of Honor; and judging by all the above, this is also the case if article 6 of the Honor Code last paragraph would not be changed.

mr. Th.R. Ludwig – Franchise attorney

Ludwig & Van Dam Franchise attorneys, franchise legal advice. Do you want to respond? Mail to ludwig@ludwigvandam.nl